Who is this article for?
This information article is aimed at helping anyone gain a basic understanding of insurance. Bolster Risk Management deals in ‘personal insurance’.
This means anything that effects the body (such as health, accident and death).
There are other types of insurance, such as boat, car and house insurance.
These are typically known, rather antiquatedly, as ‘fire and general’ cover. This booklet does not deal with these.
Note: this is not a policy document. It’s a basic guide to some of the more relatable insurance issues, the ones we discuss with clients time and again. Always seek advice from a registered adviser if you have any insurance questions.
What can you expect to read?
Common questions and concerns from people like you. We speak to a lot of people – we love to, it’s our job – and the people we speak with all tend to have similar questions and concerns.
These include:
- Why do I need insurance?
- What will it cost me?
- What types are there?
- What if the insurer fails?
- What if they don’t pay claims!
- Why do I need a broker?
- What does a broker do?
- Who pays the adviser?
- Why is it so complicated?
What exactly is insurance?
History
Insurance has been around since the Babylonian traders. Life insurance as a category was not formalised until the first contracts written in the early 1700s. This gave rise to the use of the mortality rate, a measure of the number and causes of deaths. This quickly led to the use of ‘actuaries’, those who look at all possible risks and quantify these risks into possible liabilities.
So, what is it?
Insurance is simply the transfer of risk, from one person (or entity) to another. It is a means of protection from financial loss, or more formerly, risk management. Essentially, you pay a premium to someone else, an organization, usually, so that if a risk event occurs, you are financially covered.
Ok… so, show me how it works…?
A simple way to describe what it is, is to describe what might happen if you had it.
Let’s say that Leon has a family and a mortgage owing $500,000 to the bank. Unfortunately, Leon dies, leaving his wife and family with that debt.
The simple risk = $500,000 to the bank. But what does that mean in practical terms? The bank could foreclose or repossess the house if the family is unable to pay the mortgage repayments.
Therefore, the actual risk = $500,000 and the loss of the family home, a slightly different and, let’s face it, less attractive picture.
The solution: Pay someone else a small amount (a premium to the insurance company), so that in the event of death, the insurance company will give Leon’s wife $500,000. This means the risk has been transferred from Leon to the insurance company for the price of the premium.
Product Types
Broadly, there are five types of personal insurance: Life, Trauma, Income Replacement, Total and Permanent Disability (TPD), and Health and Medical insurance.
Life insurance
Death cover (a lump sum benefit). Some insurers will pay on terminal illness (if you are likely to die within 12 months).
Trauma insurance
Serious illness or accident (lump sum cover). Sometimes known as critical cover (although this is occasionally a ‘skinny’ version of a full trauma product).
Income Replacement: Income Protection
Replaces part of your income because you become too sick or injured to work (monthly paying benefit). This type of benefit is often offset by other income (such as ACC payments).
Income Replacement: Mortgage Protection
Pays most or all your mortgage repayments on a monthly basis because you are too sick or injured to work. This can also be used to replace a portion of your gross income, (can be up to 45%) to help pay rent and other expenses.
Total and Permanent Disability
Never able to work again? This may mean that you cannot work in your current occupation, or you may never work again in any meaningful capacity. It pays you a lump sum benefit.
Health and Medical
For elective treatment (not acute), i.e. it’s for surgery, not a car accident. If you need a shoulder reconstruction or treatment for bowel cancer, you may be able to claim (policy conditions may apply).
What is BMI and how might it effect your personal insurance?
Body Mass Index is a simple tool that helps insurance providers. The index helps the insurance underwriters to assess the ‘risk’ that you might pose them as a policy holder.
A very high (or low) index, may mean that there are underlying health conditions.
Check out the calculator for yourself.
Insurers, brokers and you
Insurers
Each insurer has an array different features and benefits for their various products, themselves too numerous and complex to try and distinguish them here. The products categories above are a simplified and generic view, and a method of segmenting them for future discussion. Part of a good adviser’s role is to make sure that the product selected for you matches your situation.
QuoteMonster™, an independent quoting platform that some financial advisers use for insurance, suggests that there are over 20,000 product variations in New Zealand alone. This obviously makes it extremely difficult for the general public, people like you, to navigate through all these variations and product differences.
Brokers, insurance agents, advisors
The purpose of a good financial adviser is to guide you through the process of making the purchasing decision. However, it doesn’t (and shouldn’t) end there. As a lifetime client, that adviser will be there to help you and your family on an ongoing basis, as little or as much as you need them. They can assist you to make claims, to ensure that you get the benefits that you have been paying for, and to review your product choices. The broker is your advocate.
They sell on behalf of the insurer, they help you purchase the products and benefits that suit your requirements, and then they assist your claims if (and when) they occur.
The agents are paid a commission from the insurance companies.
Price, Cost & Premiums
The primary question people ask
How much will it cost?
With so many product variations, the price is difficult to determine. It is not like buying a tin of beans. On top of the varieties of different products, a number of other factors feed into the final cost of premiums. We can, at least, outline what those are.
Below is a list of some of the key factors that influence the price of cover:
- What is the total sum insured?
- Age of the person insured
- Gender – yes, different prices between menand women, determined by risk factors
- Smoker or not (including vape & e- cigarettes)
- CPI (consumer price index)
- Underlying cost of the product, as determinedby each company
- Certain pre-existing conditions mayincrease the premium. This will show in the Offer of Terms from the insurer
- Weight. Excessive BMI (body Mass Index) willattract higher premiums
For monthly-paying benefits such as income protection and mortgage repayment insurance, there are often additional factors to consider, such as:
- How quickly does the insurer start paying?
- How long does the insurer pay for?
- Are any additional add-ons and benefits applied to the cover
Read this article to get a better understanding of how the premiums are determined.
What if….?
A question that comes up quite often is, “what happens if the insurer fails?”
While there is not a specific guarantee on insurance companies, there are several factors to consider. Each is financially rated with a reputable agency (such as Standard & Poors). The insurance industry is regulated under the Reserve Bank (RBNZ) and the Financial Markets Authority (FMA). From a market perspective, if a company was running into difficulty, it is highly likely that the asset book (all the policies) would be sold to another insurer. The net effect on the policyholders would likely be negligible.
The insurance companies try to avoid paying claims… don’t they?
It is in the interests of insurance companies to pay claims. If they don’t, then people will stop buying their insurance, brokers will stop recommending their products and the company will become less than competitive. The top insurers make a point of telling everyone exactly how much they payout each year, to whom and why.
Most companies will pay around 90-95% of all claims made. Those that are not paid are normally due to the claim not being eligible in the first place. On rare occasions, claims are not paid due to fraud, i.e. claimants trying to claim when they are deliberately misleading the insurer.
Why do I really need insurance..?
The best explanation…
Maybe you don’t need insurance..!
If you don’t have responsibilities to anyone, if your income is fully secure for the next 30-40 years through to retirement and beyond and if you are totally debt-free, then you may not need insurance. For everyone else (!) talk to your adviser to find out more.
We hope this introduction to basic insurance products and concepts was useful. To finish, a little clarification around some common insurance terms.